The Daily Reckoning - The Asian Bubble (Doug Casey)

verfasst von Firmian, 05.02.2004, 18:23

-->The Asian Bubble

The Daily Reckoning

Paris, France

Wednesday, 4 February 2004


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*** Mood over Manhattan: common bullishness... or clinical
insanity...?

*** Residential housing soars... commercial housing falls...

*** GE, GM... welcome to the 'finance economy'... and watch
out! Bombay stocks... LEAPS... yin and yang... and more!

---------------------

The cheerful mood over Manhattan... is it normal
bullishness, or is treatment needed?

Americans are bullish, of course, about almost everything.
Nothing can go wrong, they believe - at least not before
the elections.

They are 'delusional,' we have said. And here we quote
ourselves:"They believe things that couldn't possibly be
true for even a single minute will last forever." They
cannot save a dime... yet, they set out to save the entire
world.

Now cometh Yale University assistant professor of
psychiatry, Bandy Xenobia Lee, with a clinical view.
Appearing before the World Economic Forum in Davos, Mr. Lee
read aloud the standard medical description of
'narcissistic personality disorder.' The sufferer:

** has a grandiose sense of self importance, e.g.
exaggerates achievements and talents, expects to be
recognized as superior without commensurate achievements

** is preoccupied with fantasies of unlimited success,
power, brilliance

** requires excessive admiration

** has a sense of entitlement, i.e. unreasonable
expectations of especially favorable treatment or automatic
compliance with his or her expectations

** shows arrogant, haughty behaviors or attitudes

Americans think they are getting rich. As reported here
yesterday, personal incomes rose a paltry 0.2% in Dec.
Spending rose twice as fast.

Dismal.com reports that wage and salary income actually
went down in December for the first time in 14 months. Real
wages have gone almost nowhere for many years. For certain
groups, notably men working in factories, wages have fallen
for decades.

What leads Americans to think they are better off is the
rise in real estate prices. Sales prices for single-family
houses rose at about 7% last year - or 2 times as fast as
GDP. Sales numbers are rising at a double-digit pace.

The longer a trend keeps going, the more people believe it
is eternal. House prices have never gone down in a single
year for the last four decades. Having come to believe that
house prices only go up, people see little risk in buying -
at any price. Lower interest rates have allowed them to buy
more house for the same monthly payment. God forbid
interest rates would rise!

But interest rates do rise... and housing prices do fall.
And sometimes housing prices fall even as interest rates
come down, as has happened in Japan. Something is bound to
happen. If the 'recovery' turns out to be for real, the
economy will take off and interest rates will rise. If the
recovery is, as we expect, a failure... the economy will
weaken and house prices are likely to fall along with
stocks. In the first event, many Americans will not be able
to afford their mortgages... in the second, they will no
longer want them.

But the self-delusion of our fellow countrymen seems to
grow daily.

Residential construction (a consumption item) is increasing
at a furious pace - up 14% in December. Non-residential
construction (an investment item) actually fell 3%.

GE used to make money by making appliances. Now, half of
its earnings comes from financing activities, says Bill
Gross. GM also used to make money by making cars. Now, its
profits too come from financial activities. As a percentage
of total earnings, those coming from 'finance' have soared.

It's become a"finance-based" economy, Gross concludes.
What happens to such an economy? It needs more and more
low-cost money in order to maintain the illusion of growth
and prosperity. But eventually, the costs of financing a
finance-based economy grow too large... and the whole thing
falls apart.

Freeman Tilden described the end of a"finance-based"
economy in his 1935 book, A World in Debt.

"... back in 1927 and 1928, when the world was a tornado of
prosperity of the paper persuasion... I said that this thing
had happened before, many times; and invariably it had also
happened that the balloon was pricked, and deflation
followed; that the inevitable penalty for a boom was a
crash; that whatever political party happened to be in
power when the smash arrived, would be the object of
loathing and contempt; and that for several years the
disillusioned populace would be so busy pitying themselves
that they would become the victims of every impostor and
imposture that effrontery and ignorance could contrive..."

February, 4, 2004... the tornado still whirls... and we're a
long way from Oklahoma...

Addison, what else is new?

-------------

Addison Wiggin, engaging in self-delusion...

- How we delude ourselves. A headline this morning in the
Washington Post reads:"Spending Outpaces Incomes."
Foolishly, we read further, thinking the article will
explain why this is a bad thing. But so deep is our level
of self-delusion, we failed to see that this was intended
by the editors at the Post as a positive headline.

- Spending, we must pinch and remind ourselves, is what
keeps the U.S. economy afloat... and with it, the world
economy."Personal spending had been flat in September and
October," the Post explains,"prompting some economists to
worry that consumers, who have kept the economy growing
since the recession [that wasn't], might pull back because
of feeble job growth in the past several months." Well, you
might expect that to be the case...

-... but yesterday's consumer spending report from the U.S.
Commerce Department allays such gloomy fears. Consumer
spending grew at a 'brisk' half percent in the December
holiday shopping season, double the rate at which personal
incomes for the same period grew. Again, silly us, we
thought that might be cause for concern. The Post, however,
suggests that it's"another sign that shoppers were
continuing to add fuel to the economy's expansion." No
mention is made of where they got the money to spend. But
we know, don't we? [Hint: it's starts with a 'd' and ends
with a 't' with an 'eb' in the middle].

- The spending report"exposes the weak underbelly of this
recovery," Mark Vitner of Wachovia Economics Group wrote to
his clients, reports the Post."Tax cuts and lower mortgage
rates saved the day in 2003... but the recovery will be in
serious trouble if job growth does not pick up soon."

- It appears that consumer prices are falling, too. At
least, that is, for people who don't eat and wear very
heavy sweaters. The Commerce Dept. report suggested that by
suppressing food and energy from the figures, consumer
prices rose at the slowest year-over-year pace since
government busybodies began keeping track 44 years ago. The
year-over-year rate of inflation in the CPI has slowed in
each of the last three months.

- Still, the Commerce Dept. data detracted from the markets
yesterday about as much as a pimple on a pretty girl's
face. The Dow closed up a weak 6 points at 10,505. The S&P
500 couldn't eek out a full point, but it didn't fall,
either... it closed roughly where it started at 1,136. The
Nasdaq added 3 points to 2,066. In all, it was a pretty
limp day on the trading floor.

- The dollar fell to a fresh 3-year low against the yen and
lost a tad against the euro yesterday. Despite the best
intentions of the ECB, you can still purchase one unit of
the Esperanto Currency for a buck and a quarter, if you're
so inclined.

- Gold traded briefly as high as $403 in London yesterday,
but as of this writing is back down to $398 in
Sydney... still lingering below the $400 remorse price.
Ahead of Friday's G7 meeting in Boca Raton, we're not
likely to see a lot of movement in gold or the dollar.
Chuck Butler from the Everbank World Currency trading desk
tells us currencies - the euro, the dollar, yen and yuan -
will be the main course at the dinner table. Chuck's bet
for the biggest eater at the table?"I'll buy all the euros
they want to sell," says Chuck.

- What's up with George Soros? Newsmax.com opines that he's
planning an"October Surprise" for George W. Bush, in which
he will orchestrate a crash in the dollar on the eve of the
election, similar to the massive short position he took
against the British pound in 1992.

-"The Hungarian-born Soros' hatred of President Bush is no
secret," says Jon Dougherty. So strong are his fanatical
convictions, Soros' apparently told the Washington Post he
would give away his whole fortune"if someone could
guarantee" Bush's defeat. The operative word being
"guarantee." (Of course, all of this was news to us, but
what do we know of Soros' secret passion?)

- On the other hand,"investors should listen to George
Soros," writes Bloomberg's William Pesek Jr., also on the
Soros beat."Not because he's an influential market guru.
Not because of his profitable 1992 bet on the pound's fall.
Not because then Malaysian leader Mahathir Mohamad accused
him of speculating against the ringgit in 1997 [and calling
him a 'moron' in the process.] Soros' alerts about the
world's biggest economy and its most dynamic are important
because many facts are on his side."

-"In the U.S.," Pesek continues,"the current account and
budget deficits are spooking investors who wonder if the
World's number-one economy is living too far beyond its
means and that a day of reckoning is near." We couldn't
have said it better ourselves...

-------------

Bill Bonner, back in Paris...

*** The Indian economy has"never been better." The BBC
reports the words of the India's Finance Minister, a Mr.
Singh. Since the country began eliminating government
controls and selling off state-owned enterprises, a process
that began about 10 years ago, business is booming. The
Sensex - the Mumbai (Bombay) stock index - has risen nearly
100% in the last 12 months. GDP growth is expected to
exceed 8% this year.

***"Do you know what an 'experience' is?" asks a Daily
Reckoning reader.

"An 'experience' is what one gets when one doesn't get what
one wants.

"And since you bring money and women into the picture, it
is appropriate to mention that when a man with money meets
a women with experience, the man with the money generally
gets the 'experience' and the woman generally gets the
money."

*** Uh oh... we mixed up the yin and the yang...

A reader from Singapore:

"In today's article you used 'Yin' to imply the positive
and 'Yang' the negative.

"The Chinese character for 'Yin' means 'dark, malign,
cruel, etc, anything negative... '

"The Chinese character for 'Yang' means 'bright, uplifting,
kind, etc, anything positive... '

"So Yin Yang = Bad Good (not Good Bad)."

---------------------

The Daily Reckoning PRESENTS: The prospects for China and
Thailand are looking bright... but bubblicious, at least in
the short term. Doug Casey reports, below.


THE ASIAN BUBBLE
by Doug Casey

Asian countries are the current darlings of the financial
press. Hardly a day goes by when someone doesn't pay homage
to their spectacular growth prospects - especially China's.
But if you ask me, they're in a bubble.

I'm not trying to be negative about something most people
seem to think is a"sure thing" just for the sake of being
contrary. Although the fact everybody likes something as
an investment is reason enough to be contrary. I'm a huge
China bull, for instance. But the time to buy is during a
crisis, not what's likely the peak of a boom.

I've spent a fair amount of time in China over the years,
not even counting living in Hong Kong. There's no question
in my mind the 21st Century will belong to China, much as
the 20th did to America. Europe will mainly serve as a
source of houseboys and maids for the Chinese. But, try as
I might, I can't see a safe direct way to take advantage of
this megatrend at the moment.

It's widely touted in the press that the Chinese yuan is an
undervalued currency. That's become accepted as an article
of faith by everyone from government officials to financial
advisers. I'm not so sure when I look at property prices in
Beijing and Shanghai. Further, the reported money supply has
been increasing over 20% per year.

It might work out, but holding yuan in hopes of an
upvaluation impresses me as a mediocre bet. Certainly if you
hold them in a Chinese bank, most of which are insolvent.
S&P reports that about 45% of Chinese bank loans, totaling
about $850 billion, are non-performing. That's why the
Chinese government recently shelled out something like $45
billion to shore up two big banks.

The Chinese government reported that it held $403 billion of
foreign exchange reserves at the end of 2003, net of the $45
billion they used in the bank bailout. That's a rise of $117
billion from the end of 2002. It's unclear in exactly in
what form that money is held, but the vast majority is
undoubtedly U.S. dollars. Supposedly, the Chinese have been
selling yuan to buy dollars (in the form of U.S. Treasury
securities) in order to enhance their exports. Maybe. After
all, the U.S. appears to have a bottomless appetite for both
foreign capital and foreign goods. But if I was a Chinese
central banker, I'd feel pretty stupid holding all those
floating abstractions, especially as they've lost about one
third of their value against stronger currencies in the last
couple of years. And I'd want to replace the paper with
gold.

How about buying Chinese stocks? I don't think it makes any
sense. The huge amount of bad bank debt, combined with
government bailouts, a rapidly expanding money supply, and
an absolutely frenetic building boom has got to have
created gigantic distortions in the country's economy. You
have no way of knowing how all that could affect any given
company. But it's not likely to be good.

And when you do buy, what you'll want are small,
entrepreneurially run companies, not doddering behemoths
that were spun off by the State, overloaded with self-
dealing, concrete-bound managers and zillions of extra
employees. That describes most public Chinese companies.
The Chinese press has recently reported that, in the first
half of 2003, 8,000 communist Party members fled abroad,
6,500 are listed as missing, and another 1,200 committed
suicide. Even with 65 million Party members, these are
anomalous numbers. The speculation is that many of them
were afraid of being caught in corruption.

All of this has caused me to write off China for the time
being. But China is just part (albeit a major part) of
Asia. And in many ways, the Orient is still one of the best
places for an investor to be on the lookout right now.

Which leads me to Thailand. Thailand, where I spent almost
three weeks over the Christmas holidays, has always been my
favorite country in the Orient as a lifestyle choice. It's
an excellent choice for the holidays, as well, if only
because you're likely to be bedeviled with sappy Christmas
carols only on December 25th itself. Santa Claus, like
McDonald's and Coca-Cola, can be found in every nook and
cranny of the world.

As an investment, beachfront land here has been a standout,
going up about ten times in the last decade alone. It's not
absolutely cheap any more; an acre of beachfront on Koh
Samui will run about $200,000, minimum. Of course, that's
still cheap relative to what you pay in Hawaii, or Florida,
or California. And it's far more desirable, in my opinion.
You'll find the costs of food, construction, and servants
are a tiny fraction of what they would be in the States.
And although you can easily get absolutely anything you
want, the lifestyle is far more laid back. One reason it's
so friendly is that it is the only country in this part of
the world that was never colonized.

Thailand is actually the safest and surest way to play the
boom in China, as well. As the Chinese middle class grows,
they'll travel. And they'll pile into Thailand, as a first-
choice foreign destination, simply because it's such a
delightful place. The price of land is going to go much
higher.

Of course, things can go wrong for a while; timing is
important. The main downside to Thailand is its government,
under Prime Minister Thaksin. It's currently a popular
regime but, for reasons I'll describe shortly, there's
serious trouble brewing. Thaksin used to be a general in
the (notoriously corrupt) Thai police; to have risen to
that height, you've got to presume Thaksin excelled at
corruption. He also has an unfortunate authoritarian
streak, reminiscent of Singapore's Lee Kwan Yu and
Malaysia's Mahattir. Which partially accounts for a rather
astounding 2,500 supposed drug dealers being killed in gun
battles with police over the last year. And insane new
rules forcing bars to close at 1am and soon, the rumor is,
at midnight. Thailand is, in case you didn't know, the
party capital of the Orient.

Thaksin thinks the Thais are too undisciplined; in fact he
thinks everything is too undisciplined. So he's trying to
organize new international cartels for sugar, rubber, and
rice - but cartels always end in disaster. Among other
stupid economic ideas are the building of a $35 billion
canal across the peninsula, lots of easy credit for both
business and consumers, price controls, cash giveaways
averaging $23,000 each to 70,000 local hamlets, subsidized
home loans, and allowing debtors to put off loan
repayments.

What this megalomaniacal nincompoop is doing is creating a
credit-driven boom, and it's going to result in a bust.
Most Thai companies are highly leveraged, so it's welcomed
by everyone right now, especially Thai investors. All the
world's stock markets, which tend to move together, went up
substantially last year - mostly, I believe, as a reaction
to having gone down for three years. But there's no good
reason for the Thai stock market to have gone up about 100%
last year (making it the world's best-performing market)
other than a booming money supply.

Fortunately, Thai culture will outlast Thaksin, the boom,
and the coming bust. And the country remains perhaps my top
choice as a place to both vacation and to have a crib in
the Orient. But I'd hold off major investments until the
bust. Which I expect will come within a couple years.

Regards,

Doug Casey
For the Daily Reckoning

P.S. Here's a travel tip. The best hotel in the world, for
my money, is the Peninsula in Bangkok. It's much classier,
and half the price, of the Oriental across the river, which
has been unjustly rated as the best for years. In Koh
Samui, don't even think of staying at the outrageously
overpriced Meridian; stay at the excellent, and
conveniently located, Nordic Inn, for US$50 a night.

P.P.S. I recognize that few will take advantage of"foreign
country" tips; perhaps they're too exotic. But most good
investments are off the beaten path, and a little hard to
get into. And often a little scary. It's once they're
popular, and most of their potential has already been
realized, that, perversely, they carry serious risk.

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• The Daily Reckoning - The Asian Bubble (Doug Casey) - Firmian, 05.02.2004, 18:23
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